Leading U.S. AI firms are handing essentially all free cash flow to infrastructure that costs roughly twice what it should, as competition for power, land, and chips lets suppliers charge scarcity prices. We know houses built when construction costs are high will fall when costs normalize. Markets are rewarding unusually inefficient investment. There is no guarantee of winner-take-all; a latecomer buying capacity at normal prices could surpass early participants who overpaid. The productivity gains and market value of AI may go to the companies that use it rather than the few that spent fortunes pioneering it.
Exposure to the future economy also need not be a single bet on U.S. technology. Chinese AI firms offer a partially independent claim on the same future. This year China's megacap technology companies performed poorly while domestic A-shares did well - nearly the opposite of the U.S.
Europe is the clearest exposure to today's economy. Left out of the AI boom, it remains a rich and diverse economic zone. Its heavy weighting in banks, energy, and industrials provides diversification for a portfolio concentrated in the future economy.
European exposure can also be obtained through corporate credit. This is economically justified as European companies have a relatively higher reliance on debt rather than equity compared to U.S. companies. And Europe may have its AI comeback on better terms: data centers built after the surge at normal prices, with AI productivity offsetting the short work week.
AI is effectively a systematic risk factor: it pervades many asset classes, carries both risk and return, and has no hedge other than avoiding it. Risk models with short-term statistical factors are already detecting it, named or not. The future economy will arrive in some form; today's economy will adapt and hold value within it. Diversified exposure to both is the answer.
Private Markets Catch Up
Private markets are catching up by becoming ordinary. After some scares and major redemptions, private debt is settling down; investors should not expect extraordinary returns as yields normalize toward risk-adjusted public credit. Private equity remains quietly present, with abundant committed capital competing for deals and moderating returns.
One factor differentiating private equity: AI startups are forming quickly, and almost entirely outside public markets. They are capital-light, so public listing is inefficient for them, and private equity's capital surplus makes funding easy.
In both, funds and technology keep improving, lowering fees and easing illiquidity. This supports our longstanding thesis that private markets are slowly turning into another asset class, helpful but not exceptional. Investors can meet their goals without them, but could enhance performance by using them optimally.